We all know the market has broken down after losing S&P 500 1249 on big volume. It meant we lost the bottom of the base. It also meant we lost the long-term up trend line from the March 2009 lows. When market breaks like that, we look for a confirmation with regards to volume, and we certainly did get that. So now, where are we? Well, all down trends have a stopping point for a while before continuing down once again. What forms is a handle, a trading range if you will, that allows some of the oversold steam to get washed out. You need to unwind some violently oversold oscillators. Normal behavior.
It isn’t bullish just because we stop moving down. Not one bit. It actually is healthy from the perspective of the bears as it allows them time to reset thing,s and get rocking lower once again once there’s been enough unwinding without too much upside in terms of price appreciation. I believe this process is under way now, although in a bear such as this, you can’t guarantee that’s what’s taking place. Bad news can hit from overseas in Europe on a bank default, and there goes the handle. Wiped out. So, no guarantees that we hold onto a handle formation here, but the odds are starting to increase that that’s where we are for the moment.
Now remember this, handles can be very intense in terms of whipsaw action, and very emotional as there are strong up days and strong down days. Each one of them will make you feel differently from day to day. Oh, so the worst is over. Oh, so now we are about to crash again. Neither of which will be true. Don’t get caught up in the emotion of this handle should it be in the cards for several weeks. Respect it for why it exists, and then maybe you can take the emotion out of it to some degree. A 300-point up day will make you feel like the bull is back, and a 300-point down day will make you over react negatively. We’ll need a bit of time to establish the handle levels, but it appears to be under way as we speak. There’s no way to know how long a handle lasts either. It can be days, weeks, or even months. I suspect a few weeks, but we don’t know for sure. A day at a time as it takes place, and we can then define things more clearly in terms of price.
Today was very interesting in terms of sentiment. We actually saw the bull-bear spread get a bit more bullish in terms of less bears and more bulls. WHAT?? It’s hard to believe, for sure, but that’s what took place. We went higher on the bull-bear spread as the difference is now up to 23.6%. I thought we would see numbers that reflected the recent weakness of the past 5-10 trading days, but amazingly, that wasn’t the case at all. Don’t ask me to explain it because I can’t. Even single digit readings would have made sense to me. However, since the numbers went the wrong way, the bulls can’t use sentiment as a way to explain the worst is about over, because things are too bearish out there. It would seem to me we will need a period of deeper selling to scare folks even more before we can reach the appropriate bottom of this down trending market.
We all know what was the worst performing area of the market today, don’t we. Those frisky financial and bank stocks, which simply never bid more than a day, or two, before finding more sellers wanting to get out. They use any bounce to remove themselves from those dead stocks. Years of decay have made folks sour on them to the point of never wanting to be in them. At least that’s what one would think. Those sentiment numbers don’t really suggest that, but either way, no one wants in on them. When we look at the erosion of stocks, such as Bank of America Corporation (BAC) and Citigroup (C), who can blame them. One of these days they’ll be back in favor, but it looks like that’s too far out in the future to even grab a glimpse. For now, they should be avoided more than any other sector in this market.
The markets got so oversold intraday yesterday, it’s no shock that it was a buy the news event with regards to the fed. RSI’s in the 15 range is basically unheard of. Even in the worst of bear markets you rarely, if ever, see those types of readings, especially on a closing basis. Intraday is weird enough, but we had a double bottom at 15 RSI, thus, the rally was no shock to unwind. However, look at how fast things went back down today. No sustainable recovery. No follow through to the upside. Back and forth is the best the bulls can hope for short-term. RSI’s may stay below 50, if not 40/45, for many weeks, if not months. That’s normal protocol in bear markets. No different than bulls markets where the RSI’s stay above 50, if not 55/60, for months at a time. With the weekly charts on massive breakdown, you can pretty much count on the RSI’s staying weak for quite some time to come.
So, I think we handle here for now, but things could get a lot worse if the banks start defaulting overseas. That could hit at any time. Stay nimble. 1101 S&P 500 is massive support. If that breaks, lights out. 1199 is strong resistance for now, up to 1225 on the S&P 500. Cash is the best way for now.
Peace,
Jack
